ARK Wealth Insights

As I notice that two of my clients turn 70 today, I am reminded of two planning opportunities that are worth mentioning. Each became more useful after the new tax bill went into effect on January 1st of this year. With strategies that aren’t particularly new, two changes in the tax code: the increase of the standard deduction, and the lowering of overall rates have opened new windows of opportunity
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Starting
January 1, 2010, the rule that limited Roth conversions to taxpayers earning less than $100,000 went away. Effectively, anyone could then convert traditional IRAs to Roths. But, that change wasn’t very helpful because of tax brackets at that time. In 2010, from 100k to 137k of taxable

With the lure of tax-free distributions, Roth IRAs have become popular retirement savings vehicles. According to the 2017 Investment Company Fact Book, about 17.4% of U.S. households owned Roth IRAs in 2016. One way to fund a Roth IRA is to convert some or all of your IRA or retirement plan money to a Roth IRA.

Roth IRAs — background

There are three ways to fund a Roth IRA — you can contribute directly, you can convert all or part of a traditional IRA to a Roth IRA, or you can roll funds over from an eligible employer retirement plan.

When you sit down with a financial professional to update your retirement plan, you may encounter a Monte Carlo simulation, a financial forecasting method that has become more prevalent in the last few years. Monte Carlo financial simulations project and illustrate the probability that you'll reach your financial goals, and might help you make a more informed investment decision.

Estimating investment returns

All financial forecasts must account for variables like inflation rates and investment returns. The catch is that these variables have to be estimated, and the estimate used is key to a forecast's results. For example, a forecast that assumes stocks will earn an average of 4% each year for the next 20 years will differ significantly from a forecast that assumes an average annual return of 8% over the same period.

Estimating investment returns is particularly difficult. For example, the volatility of stock returns can make short-term projections almost meaningless. Multiple factors influence investment returns, including events such as natural disasters and terrorist attacks, which are unpredictable. So, it's important to understand how different forecasting methods handle uncertainty.

You probably already know you need to monitor your investment portfolio and update it periodically. Even if you've chosen an asset allocation, market forces may quickly begin to tweak it. For example, if stock prices go up, you may eventually find yourself with a greater percentage of stocks in your portfolio than you want. If stock prices go down, you might worry that you won't be able to reach your financial goals. The same is true for bonds and other investments.

Do you have a strategy for dealing with those changes? You'll probably want to take a look at your individual investments, but you'll also want to think about your asset allocation. Just like your initial investing strategy, your game plan for fine-tuning your portfolio periodically should reflect your investing personality.

The simplest choice is to set it and forget it — to make no changes and let whatever happens happen. If you've allocated wisely and chosen good investments, you could simply sit back and do nothing. But even if you're happy with your overall returns and tell yourself, "if it's not broken, don't fix it," remember that your circumstances will change over time. Those changes may affect how well your investments match your goals, especially if they're unexpected. At a minimum, you should periodically review the reasons for your initial choices to make sure they're still valid.

The cost of long-term care can quickly deplete your savings and affect the quality of life for you and your family. Long-term care insurance allows you to share that cost with an insurance company. But premiums for long-term care insurance can be expensive, and cash or income to cover those premiums may not be readily available. One option is to exchange your annuity contract for a long-term care insurance policy.

Section 1035 exchange

Generally, withdrawals from a nonqualified deferred annuity (premiums paid with after-tax dollars) are considered to come first from earnings, then from your investment (premiums paid) in the contract. The earnings portion of the withdrawal is treated as income to the annuity owner, subject to ordinary income taxes. IRC Section 1035 allows you to exchange one annuity for another without any immediate tax consequences, as long as certain requirements are met. However, prior to 2010, an annuity couldn't be exchanged for a long-term care insurance policy on a tax-free basis. But the Pension Protection Act (PPA) changed that and, as of January 1, 2010, both life insurance and annuities may be exchanged, tax free, for qualified long-term care insurance.

Investing for your retirement isn't about getting rich quick. More often, it's about having a game plan that you can live with over a long time. You wouldn't expect to be able to play the piano without learning the basics and practicing. Investing for your retirement over the long term also takes a little knowledge and discipline. Though there can be no guarantee that any investment strategy will be successful and all investing involves risk, including the possible loss of principal, there are ways to help yourself build your retirement nest egg.

Compounding is your best friend

It's the "rolling snowball" effect. Put simply, compounding pays you earnings on your reinvested earnings. Here's how it works: Let's say you invest $100, and that money earns a 7% annual return. At the end of a year, the $7 you earned is added to your $100; that would give you $107 in your account. If you earn 7% again the next year, you're earning 7% of $107 rather than $100, as you did in the first year. That adds $7.49 to your account instead of $7. In the third year with a 7% return, you'd earn $8 and have a total of $122. Like a snowball rolling downhill, the value of compounding grows the longer you leave your money in the account. In effect, compounding can do some of the work of building a nest egg for you.

More women are working and taking charge of their own retirement planning than ever before. What does retirement mean to you? Do you dream of traveling? Pursuing a hobby? Volunteering your time, or starting a new career or business? Simply enjoying more time with your grandchildren? Whatever your goal, you'll need a retirement income plan that's designed to support the retirement lifestyle that you envision, and minimize the risk that you'll outlive your savings.

When will you retire?

Establishing a target age is important, because when you retire will significantly affect how much you need to save. For example, if you retire early at age 55 as opposed to waiting until age 67, you'll shorten the time